Wells v Canadian Northern Shield Insurance Co [2007] BCSC

Liability and Duty to Defend

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  Known as the CGL
  
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  Most common policy for Canadian businesses
  
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  Basic premise: the risk to be insured by the CGL is the possibility that the insured’s business related activities, or its product or work once completed, will cause bodily or personal injury or property damage to third parties for which the insured may be held legally liable.
  

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  Liability coverage is not intended to cover damage to the insured’s person or property (such coverage is called “first party” coverage, e.g. for property loss or accident/sickness).
  
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  Generally assumed not to cover liability to repair or replace the insured’s faulty or defective product, but only the damage resulting from it. There can be exceptions to this ‘rule’: see Progressive Homes (SCC)
  
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    When you buy insurance under CGL, not insuring bad work. Rather, it pays for other people’s damage to your property
    
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  In any case, it will be necessary to examine the wording of the policy first to determine whether there is coverage
  

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  Most insurers in Canada follow the wording of the standard IBC 2100 (amended in 2011).
  
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  IBC refers to the Insurance Bureau of Canada, which was the predecessor the present Insurance Council of Canada.
  
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    See the IBC Form 2100 CGL policy (the “IBC standard wordings”)
    
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  Insurers and insureds can deviate from the IBC standard form wordings. This can produce differences in wordings among insurers’ CGLs, which can result in potentially crucial differences in coverage. (This is one reason for repeating the warning to always first look to the policy’s wordings when determining the scope of coverage in each case.)
  

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  CGL policies usually consist of several components:
  
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    Declarations
    
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    Policy wordings
    
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    Endorsements and warranties
    
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  The policy wordings are often (but not necessarily always) standard form; whereas the declarations and endorsements are more custom built for the insured’s circumstances.
  

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  A policy must provide a time period within which claims are covered: the “policy period”.
  
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  Usually runs for a 12 month period, but can be customized to be shorter or longer.
  

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  “Occurrence based” policies are actually a misnomer because they relate usually to the time the third party’s bodily injury or property damage occurred NOT when the actual accident or “occurrence” took place.
  
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    Occurrence based policies should be called “injury/damage based”, instead
    
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    I say usually above, because in exceptional cases some non-standard wordings may require that the accident (or “occurrence”) take place within the policy period
    
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  It is possible for the accident to occur long before the policy was issued, but the resulting injury or damage arises during the policy period. Such liability claims are called “long-tail”
  
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    This can produce challenges for the court to decide when the damage actually occurred, e.g. in pollution claims
    

“Claims-made” policies

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  In contrast to occurrence based policies, “claims-made” policies usually stipulate that the third party’s claim be made within the policy period
  
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    An example of the challenges this might present was found in Jesuit Fathers (see Brown text at Ch. 1).
    
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    E.g. claim made against electrician in year 5, electrician must have that policy in year 5
    
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  Sometimes the policy will also require the third party’s injury or damage (giving rise to the claim) to have happened after a “retroactive date”, which may pre-date the issuance of the policy
  
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    If there is a retroactive date, it will usually be found in the Declarations
    
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  As we saw in the first lecture, a question may arise over the meaning of the word “claim” in the absence of a definition in the policy. In Reid Crowther & Partners Ltd. v Simcoe & Erie General Ins. Co., (1993), 13 C.C.L.I. (2d) 161 (S.C.C.) at 181, Justice McLachlin gave some guidelines for determining the meaning of “claim”, while noting there is “no magic formula”:
  
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    “[w]here the reasonable insured in all the circumstances would conclude that a third party was making a claim against him or her in the sense that if satisfactory payment or other form of reparation were not made the third party would sue, then it may be said that a claim has been made, even though a formal statement of liability and/or demand has not been tendered.”
    
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  It is important to note that “claims-made” and “occurrence” are not legal labels which dictate certain legal results. They are intended only to be helpful signposts
  
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    The issue is always what the particular policy’s wording dictates, regardless of what labels are employed.
    
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  There may be different types of “claims-made” and “occurrence” policies. There may even be hybrid policies containing features of both “claims-made” and “occurrence” policies.
  

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  For simplicity, the remainder of this lecture will deal primarily with the standard IBC Form 2100 CGL for occurrence based policies.
  

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  It bears repeating that no law requires the insured and insurer in every case to use this standard format. In theory, they could create their own terms and wordings. In practice they almost never do so. And in practice, insurers do not always adopt the IBC standard form but often create their own variations.
  
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  It is a practical reality therefore, that except for the Declarations page information, the policy wordings are seldom negotiable and are treated as contacts of adhesion
  
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    This is no doubt one of the basic reasons for the courts’ adopting rules of interpretation which often favour the insured over the insurer
    

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  The IBC standard CGL wording contains a Declarations page, a general preamble and 5 substantive sections:
  
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    Coverages A to D
    
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    Meaning of insured
    
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    Limits (monetary)
    
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    Conditions
    
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    Definitions
    
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  As noted earlier, any of these may be modified by the insurer and insured to suit the particular circumstances in a given case. This may include adding “endorsements” or “riders” to expand or constrict coverage.
  

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  A *crucial* element of the insurance contract (or ‘policy’)
  
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  In most cases it is the only part of the policy that is specific to the insured’s circumstances
  
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  It usually contains the following information:
  
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    The name of the insured (the “named insured”)
    
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      There are also additional insured later on in policy, but they are not the named insured
      
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    The insured business risks
    
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    The insured’s insurable interest in the insured business
    
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    The location of the insured’s premises (owned, rented or occupied)
    
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    The policy time period for coverage (the “policy period”)
    
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    The monetary limits payable under the policy (the “policy limits”)
    
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    The premium to be paid by the insured as consideration for the policy
    
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    A list of the forms to be incorporated as the policy wordings and the additional endorsements or riders, and warranties, if any.
    
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      Warranty: if insured doesn’t do certain things, there is no coverage
      
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      Condition: …
      

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  The declaration page provides evidence of the contractual relationship between the insured and insurer
  
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    e.g. the identity of the parties, the time period, monetary limits and consideration, among other indicia.
    
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  It may be important in determining coverage issues such as misrepresentation, insurable interest or material change in risk, as the “Dec Page” (as it is sometimes called) will contain the information disclosed by the insured—e.g. its description of the business and premises.
  

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  In the standard IBC form, this gives the introduction to the use of “you” and “your” as referring to the named insured (the contracting party) and “we” and “our” to the insurer
  
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    i.e. go to declaration page to see who is “you”
    
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  It points out that the “insured” is defined in the policy’s section entitled, “Who is an insured”. This may give coverage to non-contracting parties (or “unnamed” insureds) in addition to the ‘named insured’ (e.g. spouse or employee of named insured)
  
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  It warns the insured to read the entire policy carefully.
  
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  Again, the language is not regulated and may be varied from case to case.
  

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  In most CGL policies as in the IBC standard form wordings, which we are using here, “Section I” will set out 4 categories of “Coverage”:
  
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    “A”: liability for bodily injury and property damage
    
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    “B”: liability for “personal injury” (note this is different than “bodily injury”, which is the subject of Coverage A)
    
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    “C”: medical payments
    
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    “D”: tenants’ legal liability
    
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  Note that in this course, we will focus mostly on Coverage A (liability for bodily injury and property damage), due to time constraints
  
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    This will give us a useful analysis of how CGL coverage works and the same principles can be applied for the most part to Coverages B, C and D, which will be summarized briefly later in this lecture.
    
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  In practice and as the courts remind us repeatedly, one must always turn first to the language (wording) of the policy in determining whether coverage exists for an insured in the circumstances of any given case
  
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    This rule applies equally in respect of each of the four categories of coverage. But for illustrative purposes, we will now turn our attention to Coverage A
    

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  As in all 4 coverages (A to D), Coverage A starts with an “insuring agreement”
  
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    This is a crucial component in the insurance contract as it shifts the economic consequences of loss (in this case the loss is the insured’s liability to a third party) from the insured to the insurer
    

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  An extract from the “insuring agreement” for Coverage A reads:
  

  We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of “bodily injury” or “property damage” to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under SUPPLEMENTARY PAYMENTS—COVERGES A, B AND D. This insurance applies only to “bodily injury” and “property damage” which occurs during the policy period. The “bodily injury” or “property damage” must be caused by an “occurrence”. The “occurrence” must take place in the “coverage territory”. We have the right and duty to defend any “action” seeking those compensatory damages but: The amount we will pay for compensatory damages is limited as described in SECTION III—LIMITS OF INSURANCE. We may investigate and settle any claim or “action” at our discretion; and Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments for settlements… Compensatory damages because of “bodily injury” include…damages…for care, loss of services or death…. “Property damage” that is loss of use of tangible property that is not physically injured shall be deemed to occur at the time of the “occurrence” that cause it.

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  There are several important features of the insuring agreement to note:
  

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  The words in quotation mark signify that they are defined in the Definitions section of the policy.
  
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  Coverage is limited to liability for payment of compensatory damages
  
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    E.g. Liability for specific performance and restitution, for example, would not be covered. Punitive damages are not considered compensatory and are likewise not covered.
    
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      Punitive damages: punishing litigant for doing something that is wrong
      
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      Aggravated damages: additional compensation for injury
      
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  Only fortuitous losses are covered, not those which are certain or expected
  
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    This results from the definition of “occurrence” (elsewhere in the policy) as an accident. This can raise interesting challenges for the courts: see, for example, Saindon v Sirois, discussed in the first lecture.
    
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  Thus, coverage is NOT granted for intentionally caused harm. In fact, there are three different means by which the law precludes coverage for expected or intended harm:
  
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    (1) statutory and common law (covered in earlier lectures)
    
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    (2) definition of “occurrence” in the insuring agreement and
    
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    (3) an express exclusion in the policy for expected or intended loss.
    

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  Recall from earlier lectures that negligent acts, notwithstanding they contain a necessary element of foreseeability, are held by the courts to fall within the meaning of accident, so long as they are not by design or actually known to be about to occur, and happen by chance: see, Walkem Machinery & Equipment Ltd. (SCC 1975), discussed in earlier lectures
  
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    Likewise, damage caused by faulty workmanship could be considered an accident if it was the result of negligence and was not intended nor expected by the insured: see, Progressive Homes Ltd. (SCC 2010), discussed in earlier lectures.
    
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    Question: if the insured deliberately courts the risk of liability, is this covered?
    
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  The bodily injury or property damage must occur during the policy period set out in the Declarations page.
  
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  Note the definition of “occurrence” includes an accident, including continuous or repeated exposure to substantially the same general harmful conditions. The meaning of the word ‘accident’ is not defined in the policy.
  
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    Time on risk formula, convention used by insurers
    

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  The insuring agreement (in the IBC standard wording) says, “We will have the right and duty to defend any ‘action’ seeking …compensatory damages….”
  
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  The duty to defend arises when the allegations in the action, if proven to be true, would require coverage (indemnity) under the insured’s liability policy.
  
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    See e.g. Progressive Homes (SCC), which was a case concerning the duty to defend. Such cases talk about the possibility of indemnity “if” the third party’s allegations of liability against the insured are proven to be true. In other words, if that possibility exists then there is a duty on the insurer to defend the insured.
    

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  The duty ends once the monetary limits have been “used up” for payment of judgments or settlements.
  
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  E.g. there’s a large firm that does work for contractor, restoration contractor has been given notice of claim for theft, conversion and breach of contract. Should law firm tell insurer that they don’t have a duty to defend, or should they stay quiet?
  
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    In ON, should tell insurer
    
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    If BC, shouldn’t tell insurer, since firm has been hired to defend restoration contractor
    
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      Would recommend both parties to get independent legal advice on the duty to defend w.r.t. coverage